<PAGE>
DEAR SHAREHOLDER:
This financial report covers the six months ended March 31, 2000, which is
our twenty-eighth fiscal year of operations.
Net investment income for the six months was $0.54 per share. On March 31,
2000, the net asset value per share was $15.03 and the stock closed that day at
$13.00 per share.
During the semi-annual period, the Board of Directors declared two regular
quarterly dividends of $0.26 per share payable December 10, 1999 and March 24,
2000. In addition to the regular dividends, the Board declared a capital gains
distribution of $0.0065 per share, payable on December 10, 1999.
At the end of the semi-annual period, the 73 issues in the portfolio had an
average market yield of 8.03%, an average Moody's quality rating of A1, an
average duration of 7.51 years, and an average maturity of 15.6 years. The
distribution of the portfolio maturities and quality was as follows:
<TABLE>
<S> <C>
Average Maturities
-----------------------------------------
0-1 year 3.0%
1-3 years 5.8
3-5 years 16.1
5-10 years 20.6
10-20 years 14.9
20 plus years 39.6
-----
100%
Quality
-----------------------------------------
Treasury, Agency and Aaa 36.6%
Aa 5.9
A 25.7
Baa 26.6
Below Baa 5.2
-----
100%
</TABLE>
Interest rates were quite volatile over the past six months with the yield
curve shifting dramatically. Unrelenting strength in the economy and emerging
signs of inflationary pressures prompted the Federal Reserve to raise targeted
Fed Funds 75 basis points (three 25 basis point moves) beginning in late 1999.
The result was a roughly 100 basis point increase in all treasury interest rates
below 2 years as the market not only absorbed the Fed's action, but has priced
in further tightening. The long end of the interest rate curve reacted quite
abnormally over the same period as interest rates for 30 year treasuries
actually DECLINED 21 basis points. The burgeoning U.S. Treasury surplus has
allowed the Treasury to not only reduce the amount of future supply of Treasury
securities but to begin a program of repurchasing existing long term debt. This
activity prompted strong demand for longer-dated debt which allowed interest
rates to decline while short term rates were rising. We expect the Federal
Reserve to continue raising short-term rates until economic growth begins to
moderate. Until we see these signs of moderation, the risks of higher inflation
warrant a cautious stance to interest rate risk.
For the six month period ended March 31, 2000, Fort Dearborn produced
favorable relative returns in a low absolute return environment. Growth in net
asset value of 3.01% outpaced the Investment Grade Bond Index return of 1.27%.
However, investor preference for equity funds as opposed to bond funds caused
the market price of Fort Dearborn to decline to $13.00, generating a six-month
market value return of -2.39%. Over the past 12 months, as the Investment Grade
Bond Index produced a dismal absolute return of -1.66%, Fort Dearborn actually
produced a positive return of .37%. Strong issue selection in
1
<PAGE>
our corporate portfolio was the primary driver of the out-performance in both
periods. However, the preference for equity funds once again produced a low
market value return of -9.78% as the discount to NAV widened. While there are
only limited ways we can influence the market price of Fort Dearborn, we are
committed to maintaining the excellent relative return on assets that we have
produced over the past several years.
The Board of Directors on May 22, 2000 recognized my retirement, as
President of Fort Dearborn. Mr. Jeffrey J. Diermeier, the Chief Investment
Officer of Brinson Partners, Inc., was elected to serve as President. Jeff has
worked closely with me for over twenty years in senior investment management of
Brinson Partners, Inc. and its predecessor company.
STOCK REPURCHASE PLAN
On July 28, 1988, the Board of Directors of the Company approved a
resolution to repurchase up to 700,000 of its common shares. The Company may
repurchase shares, at a price not in excess of market and at a discount from net
asset value, if and when such repurchases are deemed appropriate and in the
shareholder's best interest. Any repurchases will be made in compliance with
applicable requirements of the federal securities law.
Under such law, the Company is required to give written notice to all
shareholders of its intention to purchase stock within six months of the actual
repurchase of shares. This report is to serve as notice to all shareholders with
respect to any shares repurchased within the next six months pursuant to the
Company's stock repurchase plan.
Unaudited financial statements for the six month period ended March 31,
2000, and a list of the securities owned on that date are included in this
report.
Sincerely,
/s/ Gary P. Brinson
Gary P. Brinson, CFA
PRESIDENT
2
<PAGE>
FORT DEARBORN INCOME SECURITIES, INC. is a closed-end bond fund investing
principally in investment grade long-term fixed income debt securities. The
primary objective of Fort Dearborn is to provide its shareholders with:
- a stable stream of current income consistent with external interest rate
conditions, and
- a total return over time that is above what they could receive by
investing individually in the investment grade and long-term maturity
sectors of the bond market.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
FORT DEARBORN INCOME SECURITIES
MARKET VALUE OF INDEX AND SHARE PRICE(1)
WITH ALL DIVIDENDS/INTEREST REINVESTED
AS OF MARCH 31, 2000
<TABLE>
<CAPTION>
$ WEALTH INDEX INVESTMENT FORT
<S> <C> <C>
Grade Bond Index Dearborn
12.31.1972 18.17 18.17
3.31.1973 18.16 18.17
6.30.1973 18.06 17.10
9.30.1973 18.41 17.09
12.31.1973 18.23 16.74
3.31.1974 17.55 13.73
6.30.1974 16.61 15.62
9.30.1974 16.07 13.40
12.31.1974 17.05 16.33
3.31.1975 17.83 16.82
6.30.1975 18.43 17.61
9.30.1975 17.79 16.79
12.31.1975 19.39 16.54
3.31.1976 20.17 18.45
6.30.1976 20.19 18.37
9.30.1976 21.28 20.03
12.31.1976 22.83 20.26
3.31.1977 22.26 20.50
6.30.1977 23.08 21.07
9.30.1977 23.28 21.49
12.31.1977 23.04 20.68
3.31.1978 23.00 20.93
6.30.1978 22.70 21.00
9.30.1978 23.36 20.90
12.31.1978 22.84 19.04
3.31.1979 23.16 20.31
6.30.1979 24.15 21.40
9.30.1979 23.61 20.84
12.31.1979 21.70 19.25
3.31.1980 18.79 17.16
6.30.1980 23.31 20.99
9.30.1980 20.76 18.99
12.31.1980 20.93 19.11
3.31.1981 20.69 19.19
6.30.1981 20.24 19.51
9.30.1981 18.40 19.39
12.31.1981 20.51 20.85
3.31.1982 21.47 21.83
6.30.1982 21.63 22.26
9.30.1982 26.21 26.55
12.31.1982 29.02 28.83
3.31.1983 30.14 29.96
6.30.1983 30.55 31.44
9.30.1983 30.40 31.01
12.31.1983 30.59 31.22
3.31.1984 30.09 32.50
6.30.1984 28.94 30.21
9.30.1984 32.51 32.66
12.31.1984 35.48 37.09
3.31.1985 35.82 37.34
6.30.1985 40.17 43.27
9.30.1985 40.92 42.71
12.31.1985 45.80 46.79
3.31.1986 50.64 53.14
6.30.1986 50.88 55.71
9.30.1986 51.74 56.95
12.31.1986 54.47 57.70
3.31.1987 55.37 60.37
6.30.1987 53.02 58.78
9.30.1987 49.70 55.66
12.31.1987 53.50 56.99
3.31.1988 55.86 62.51
6.30.1988 56.58 63.41
9.30.1988 57.95 63.23
12.31.1988 58.38 65.30
3.31.1989 59.10 63.95
6.30.1989 64.57 69.00
9.30.1989 64.91 71.79
12.31.1989 67.02 73.38
3.31.1990 65.82 75.08
6.30.1990 68.35 75.50
9.30.1990 67.72 74.62
12.31.1990 71.21 80.42
3.31.1991 74.02 83.65
6.30.1991 75.16 85.57
9.30.1991 80.14 91.67
12.31.1991 84.58 96.45
3.31.1992 83.43 93.81
6.30.1992 87.02 97.18
9.30.1992 91.22 102.91
12.31.1992 91.65 101.67
3.31.1993 96.61 108.40
6.30.1993 100.19 113.71
9.30.1993 104.21 117.42
12.31.1993 103.37 112.65
3.31.1994 98.48 107.51
6.30.1994 96.30 106.80
9.30.1994 96.42 105.14
12.31.1994 97.14 101.57
3.31.1995 103.18 107.51
6.30.1995 111.98 116.50
9.30.1995 114.54 118.69
12.31.1995 121.13 126.33
3.31.1996 116.32 124.45
6.30.1996 116.17 122.62
9.30.1996 118.35 129.34
12.31.1996 123.00 137.71
3.31.1997 120.84 135.62
6.30.1997 126.34 142.43
9.30.1997 131.91 148.57
12.31.1997 136.87 156.83
3.31.1998 138.88 160.03
6.30.1998 142.78 159.51
9.30.1998 147.81 166.11
12.31.1998 148.73 178.86
3.31.1999 146.24 174.77
6.30.1999 142.24 164.31
9.30.1999 142.02 161.53
12.31.1999 145.64 157.67
3.31.2000 157.67 143.82
</TABLE>
<TABLE>
<CAPTION>
ANNUALIZED RETURNS SINCE
<S> <C>
12 MONTHS INCEPTION
-9.78% 8.25%
-1.66 7.89
</TABLE>
Returns are net of fees
(1) Share price return is impacted by changes in the premium or discount to the
net asset value (NAV) At March 31, 2000, the share price was at a 13.51%
discount to NAV.
3
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 2000
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS:
Portfolio of investments: (Note 1)
Debt securities, at value (cost $130,860,983)............ $128,319,819
Short-term securities, at cost, which approximates
market................................................. 733,826
------------
Total portfolio of investments....................... 129,053,645
Receivable for investments sold............................ 5,529,187
Receivable for interest on debt securities (Note 1)........ 2,451,778
------------
Total assets......................................... 137,034,610
------------
LIABILITIES:
Expenses:
Payable for investments purchased........................ 4,898,223
Accrued investment advisory and administrative fees
(Note 6)............................................... 150,724
Accrued custodial and transfer agent fees................ 39,437
Accrued other expenses................................... 72,217
------------
Total liabilities.................................... 5,160,601
------------
NET ASSETS (equivalent to $15.03 per share for 8,775,665
shares of capital stock outstanding) (Note 4)............. $131,874,009
============
Analysis of Net Assets:
Shareholder capital (Note 4)............................. $135,120,133
Accumulated undistributed net investment income
(Note 3)............................................... 374,924
Accumulated net realized loss on sales of investments
(Note 3)............................................... (1,079,884)
Unrealized depreciation on investments................... (2,541,164)
------------
Net assets applicable to outstanding shares.............. $131,874,009
============
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED
MARCH 31, 2000
(UNAUDITED)
<TABLE>
<S> <C>
Investment income:
Interest income earned.................................... $5,140,691
Dividend income earned.................................... 68,100
----------
Total income earned....................................... 5,208,791
----------
Expenses:
Investment advisory and administrative fees (Note 6)...... 332,414
Transfer agent and dividend disbursing agent fees......... 50,142
Directors Fees (Note 6)................................... 37,603
Stockholders reports and annual meeting fees.............. 31,622
Professional fees......................................... 19,616
Franchise taxes........................................... 7,521
Other expenses............................................ 12,811
----------
Total expenses.............................................. 491,729
----------
Net investment income....................................... 4,717,062
----------
Net realized and unrealized gain (loss) on investments:
Net realized loss from investment transactions............ (1,108,907)
Change in unrealized appreciation (depreciation).......... 251,122
----------
Total realized and unrealized gain (loss) on investments.... (857,785)
----------
Net increase in net assets from operations.................. $3,859,277
==========
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
MARCH 31, 2000 FOR THE YEAR ENDED
(UNAUDITED) SEPTEMBER 30, 1999
--------------- -------------------
<S> <C> <C>
From operations:
Net investment income.................... $ 4,717,062 $ 9,259,349
Net realized gain (loss) from investment
transactions........................... (1,108,907) 45,211
Change in unrealized appreciation
(depreciation) of investments.......... 251,122 (11,260,190)
------------ ------------
Net increase (decrease) in net assets
from operations........................ 3,859,277 (1,955,630)
Distributions to shareholders from:
Net investment income.................... (4,566,388) (9,140,420)
Net realized gain........................ (57,118) (4,394,432)
------------ ------------
Total distributions.................... (4,623,506) (13,534,852)
From capital share transactions: (Note 4)
Net asset value of shares repurchased
from shareholders...................... (169,805) --
------------ ------------
Net decrease in net assets............. (934,034) (15,490,482)
Net Assets:
Beginning of period...................... 132,808,043 148,298,525
------------ ------------
End of period (including undistributed
net investment income of $374,924 at
March 31, 2000, and $224,250 at
September 30, 1999, respectively)
(Note 3)............................... $131,874,009 $ 132,808,043
============ ============
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
FINANCIAL HIGHLIGHTS
Financial highlights for each share of capital stock outstanding through each
period:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
MARCH 31,
(UNAUDITED) YEARS ENDED SEPTEMBER 30,
----------- ----------------------------------------------------
2000 1999 1998 1997 1996 1995
----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period............................... $ 15.11 $ 16.87 $ 16.30 $ 15.97 $ 16.50 $ 15.04
--------- -------- -------- -------- -------- --------
Net investment income (1)............. 0.54 1.05 1.05 1.09 1.19 1.15
Net realized and unrealized gain
(loss) on investments................ (0.09) (1.27) 0.71 0.89 (0.56) 1.43
--------- -------- -------- -------- -------- --------
Total from investment operations...... 0.45 (0.22) 1.76 1.98 0.63 2.58
Less distributions from:
Net investment income............. (0.52) (1.04) (1.04) (1.21) (1.16) (1.12)
Net realized gain................. (0.01) (0.50) (0.15) (0.44) -- --
--------- -------- -------- -------- -------- --------
Total distributions................... (0.53) (1.54) (1.19) (1.65) (1.16) (1.12)
--------- -------- -------- -------- -------- --------
Net asset value, end of period........ $ 15.03 $ 15.11 $ 16.87 $ 16.30 $ 15.97 $ 16.50
========= ======== ======== ======== ======== ========
Market price per share at end of
period............................... $ 13.000 $ 13.875 $ 15.750 $ 15.188 $ 14.750 $ 14.625
Total investment return (market
value) (2)........................... (2.39)% (2.76)% 11.81% 14.86% 8.98% 12.88%
Total return (net asset value) (3).... 3.01% (1.48)% 11.07% 13.06% 3.84% 17.71%
Net assets at end of period (in
millions)............................ $ 131.87 $ 132.81 $ 148.30 $ 143.33 $ 140.50 $ 145.76
Ratios of expenses to average net
assets............................... 0.37% 0.73% 0.71% 0.75% 0.75% 0.69%
Ratio of net investment income to
average net assets................... 3.59% 6.61% 6.29% 6.81% 7.22% 7.34%
Portfolio turnover.................... 27.8% 69.9% 63.5% 130.0% 159.5% 126.8%
Number of shares outstanding at end of
period (in thousands)................ 8,776 8,789 8,789 8,793 8,800 8,833
</TABLE>
------------------------
(1) Beginning October 1, 1994, net investment income includes amortization of
discounts and premiums.
(2) Total investment return (market value) reflects the market value experiences
of a continuous shareholder who made commission-free acquisitions through
distributions in accordance with the shareholder reinvestment plan.
(3) Total return (net asset value) reflects the Company's portfolio performance
and is the combination of reinvested dividend income, reinvested capital
gains distributions at NAV, if any, and changes in net asset value per
share.
See Notes to Financial Statements.
7
<PAGE>
PORTFOLIO OF INVESTMENTS
MARCH 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
MOODY'S
FACE VALUE RATING COST VALUE
--------------------- -------- ------------ ------------
<C> <S> <C> <C> <C>
DEBT SECURITIES--99.4%
/ / MUNICIPAL SECURITIES (5.2%)
New Jersey Economic Development Authority,
Zero Coupon Revenue Bonds,
$25,000,000 due 2/15/18............................... Aaa $ 6,586,741 $ 6,682,800
------------ ------------
/ / U.S. GOVERNMENT
SECURITIES (18.5%)
DIRECT OBLIGATIONS--(9.3%)
U.S. Treasury Bond,
3,860,000 8.00%, due 11/15/21....................... Aaa 4,499,501 4,699,550
U.S. Treasury Notes,
1,535,000 5.75%, due 8/15/03........................ Aaa 1,517,024 1,505,259
4,850,000 6.125%, due 12/31/01...................... Aaa 4,819,877 4,815,143
970,000 7.50%, due 2/15/05........................ Aaa 998,979 1,016,075
------------ ------------
11,835,381 12,036,027
------------ ------------
AGENCY--(9.2%)
Federal Home Loan Mortgage Corp.,
Guaranteed Mortgage Certificates,
1,163,140 6.50%, due 3/01/03........................ (a) 1,175,456 1,142,950
81,866 9.00%, due 8/01/04........................ (a) 85,448 83,191
115,548 9.00%, due 3/01/24........................ (a) 119,718 119,500
Federal National Mortgage Association,
Guaranteed Mortgage Pass Thru
Certificates,
5,268,711 6.50%, due 10/01/28 Pool #405224.......... (a) 5,280,913 4,944,965
886,473 7.00%, REMIC, due 6/25/13 Series 1993-106
Class Z.................................. (a) 824,321 868,197
1,530,482 7.25%, CMO, due 3/25/23 Series 1994-69
Class CA................................. (a) 1,294,905 1,474,045
Government National Mortgage Association,
Pass Thru Mortgage Backed Certificates,
1,512,748 6.50%, due 5/15/29 Pool #781029........... (a) 1,395,746 1,426,677
1,803,073 7.50%, due 12/15/22 Pool #780230.......... (a) 1,800,574 1,797,845
------------ ------------
11,977,081 11,857,370
------------ ------------
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
PORTFOLIO OF INVESTMENTS--(CONTINUED)
MARCH 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
MOODY'S
FACE VALUE RATING COST VALUE
--------------------- -------- ------------ ------------
<C> <S> <C> <C> <C>
/ / CORPORATE BONDS AND
NOTES (75.7%)
INTERNATIONAL--(20.4%)
$ 2,500,000 Augusta Funding Ltd., 144-A, 7.375% Bond,
due 4/15/13............................... Aaa $ 2,440,480 $ 2,462,500
2,100,000 Credit Suisse-London, 144-A, 7.90% Note,
due 5/01/07............................... A3 2,095,704 1,994,143
2,295,000 Empresa National Electric, 8.125% Bond, due
2/01/97................................... Baa1 2,246,850 2,002,387
3,455,000 Interamerican Development Bank, 6.80% Note,
due 10/15/25.............................. Aaa 3,220,097 3,312,765
2,000,000 Korea Electric Power Corp., 7.00%
Debenture, due 2/01/27.................... Baa3 1,861,875 1,829,076
Petroliam Nasional Berhad, 144-A, Notes,
1,000,000 7.75%, due 8/15/15......................... Baa3 647,913 929,716
1,500,000 7.625%, due 10/15/26....................... Baa3 1,481,777 1,329,752
1,010,000 Ras Laffan Liquified Natural Gas, 144-A,
8.294% Secured Note, due 3/15/14.......... Baa3 897,855 978,732
2,500,000 Republic of Brazil, 11.625% Bond, due
4/15/04................................... B2 2,481,056 2,518,750
2,000,000 Republic of Panama, 8.25% Note, due
4/22/08................................... Ba1 1,993,488 1,795,000
2,415,000 Royal Bank of Scotland, 9.118% Bond, due
3/31/49................................... A1 2,456,899 2,485,772
3,560,000 Skandinaviska Enskilda Banken, 144-A, 6.50%
Step Bond, due 12/29/49................... A3 3,450,373 3,355,937
1,410,000 State of Israel, 7.75% Bond, due 3/15/10... A3 1,403,351 1,402,874
------------ ------------
26,677,718 26,397,404
------------ ------------
INDUSTRIAL--(21.7%)
1,825,000 Aetna Services, 7.625% Debenture,
due 8/15/26............................... A3 1,808,513 1,670,966
1,000,000 Cendant Corp., 7.75% Note, due 12/01/03.... Baa1 998,739 992,965
1,250,000 Conoco Inc., 6.95% Senior Note,
due 4/15/29............................... A3 1,250,000 1,141,005
1,500,000 Ford Motor Co., 6.625% Note,
due 10/01/28.............................. A1 1,484,066 1,309,784
1,500,000 Fred Meyer, Inc., 7.375%, due 3/01/05...... Baa3 1,467,849 1,462,681
2,000,000 Freeport-McMoran C&G, 7.20% Senior Note,
due 11/15/26.............................. B3 1,105,362 1,520,000
1,000,000 Lilly Del Mar, 144-A, 7.717% Step Bond,
due 8/01/29............................... A1 1,000,000 989,584
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
PORTFOLIO OF INVESTMENTS--(CONTINUED)
MARCH 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
MOODY'S
FACE VALUE RATING COST VALUE
--------------------- -------- ------------ ------------
<C> <S> <C> <C> <C>
Lockheed Martin Corp., Note,
$ 815,000 7.70%, due 6/15/08......................... Baa3 $ 814,830 $ 790,996
1,000,000 8.50%, due 12/01/29........................ Baa3 996,137 1,000,443
2,520,000 Monsanto Co., 144-A, 6.60% Debenture,
due 12/01/28.............................. A2 2,516,312 2,194,018
635,000 Noram Energy Corp., 6.375% Bond,
due 11/01/03.............................. Baa1 634,048 601,777
3,000,000 Philips Electronics, 7.75% Debenture,
due 5/15/25............................... A3 2,991,424 2,990,076
2,300,000 Rite Aid Corp., 7.70% Debenture,
due 2/15/27............................... Baa3 2,294,180 1,161,500
1,400,000 Rohm & Hass Co., 7.85% Debenture,
due 7/15/29............................... A3 1,456,174 1,424,146
1,400,000 SafeWay, Inc., 6.50% Note, due 11/15/08.... Baa2 1,297,069 1,294,658
2,500,000 Tennessee Gas Pipeline, 7.625% Bond,
due 4/01/37............................... Baa2 2,433,164 2,372,290
2,215,000 Time Warner Entertainment, Inc., 7.57%
Debenture, due 2/01/24.................... Baa3 2,215,000 2,108,895
1,275,000 Tyco International Group, 7.00% Bond,
due 6/15/28............................... Baa1 1,266,359 1,108,967
1,000,000 United Technology Corp., 7.50% Debenture,
due 9/15/29............................... A2 998,144 985,223
995,000 Waste Management, Inc., 7.00% Senior Note,
due 10/01/04.............................. Ba1 1,026,287 898,324
------------ ------------
30,053,657 28,018,298
------------ ------------
FINANCE--(15.3%)
950,000 Bank of America, 7.80% Note,
due 2/15/10............................... Aa3 940,054 957,477
160,000 Berkshire Hathaway, Inc., 9.75% Debenture,
due 1/15/18............................... Aaa 158,950 166,429
Centaur Funding Corp., 144-A, Bonds,
2,820 Zero Coupon, due 4/21/20.................. A3 376,860 474,465
1,500 9.08%, due 4/21/20........................ A3 1,500,000 1,567,500
2,290,000 Comed Transitional Funding Trust,
Series 1998-1, Class A6, 5.630%,
due 6/25/09............................... Aaa 2,288,888 2,098,991
2,940,000 FMR Corp., 144-A, 7.57% Bond,
due 6/15/29............................... Aa3 2,940,000 2,833,657
1,201,820 GMAC Commercial Mortgage Securities, Inc.,
Series 1998-C2, Class A2, 6.42% Bond,
due 8/15/08............................... Aaa 1,150,446 1,119,243
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
PORTFOLIO OF INVESTMENTS--(CONTINUED)
MARCH 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
MOODY'S
FACE VALUE RATING COST VALUE
--------------------- -------- ------------ ------------
<C> <S> <C> <C> <C>
$ 1,500,000 Merrill Lynch & Co., 6.875% Note,
due 11/15/18.............................. Aa3 $ 1,493,133 $ 1,344,460
1,800,000 Norwest Asset Securities Corp.,
Series 96-2, 7.00% Note, due 9/25/11...... AAA* 1,814,625 1,732,572
1,000,000 PDVSA Finance Ltd., Series 98-1, 6.45%,
due 2/15/04............................... Baa1 946,497 911,720
157,903 Residential Asset Securitization Trust,
97-A7, 7.50% Note, due 9/25/27............ AAA* 159,087 157,366
1,000,000 Salomon, Inc., 6.75% Senior Note,
due 2/15/03............................... Aa3 998,959 980,725
5,000,000 Secured Finance, Inc., 9.05% Guaranteed
Senior Secured Bond, due 12/15/04......... Aaa 4,989,964 5,369,850
------------ ------------
19,757,463 19,714,455
------------ ------------
COMMUNICATION--(8.9%)
1,385,000 Bellsouth Capital Funding, 7.875%
Debenture, due 2/15/30.................... Aa3 1,372,931 1,402,495
4,250,000 News America Holdings, Inc., 7.75% Bond,
due 1/20/24............................... Baa3 3,685,448 3,959,751
PanAmSat Corp., Notes,
800,000 6.00%, due 1/15/03........................ Baa2 799,714 756,066
1,715,000 6.375%, due 1/15/08....................... Baa2 1,708,695 1,528,395
1,500,000 Sprint Capital Corp., 6.875% Bond,
due 11/15/28.............................. Baa1 1,497,652 1,344,377
425,000 Tele-Communications, Inc., 9.80% Note,
due 2/01/12............................... A2 538,897 500,086
1,780,000 TCI Communications, Inc., 8.75% Note,
due 8/01/15............................... A2 2,171,555 1,939,146
------------ ------------
11,774,892 11,430,316
------------ ------------
UTILITIES--(5.8%)
2,500,000 Delmarva Power & Light Co., 9.95% Note,
due 12/01/20.............................. A3 2,498,219 2,734,375
1,600,000 NSTAR, 8.00% Note, due 2/15/10............. A2 1,593,570 1,639,861
1,235,000 Pacific Gas & Electric Corp., Series 93-H,
7.05% Bond, due 3/01/24................... A1 1,340,117 1,139,094
1,000,000 Public Service Co. of Colorado, 6.875%
Senior Note, due 7/15/09.................. Baa1 992,798 946,670
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
PORTFOLIO OF INVESTMENTS--(CONTINUED)
MARCH 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
MOODY'S
FACE VALUE RATING COST VALUE
--------------------- -------- ------------ ------------
<C> <S> <C> <C> <C>
$ 1,000,000 Sempra Energy, 7.95% Note, due 3/01/10..... A2 $ 997,407 $ 1,017,919
------------ ------------
7,422,111 7,477,919
------------ ------------
TRANSPORTATION--(3.6%)
1,500,000 Delta Airlines, Inc., 10.50% Pass Thru
Certificate, due 4/30/16.................. Baa1 1,775,939 1,786,170
3,000,000 United Airlines, Inc., 7.87% Pass Thru
Certificate, due 1/30/19.................. Baa1 3,000,000 2,919,060
------------ ------------
4,775,939 4,705,230
------------ ------------
Total Debt Securities...................... 130,860,983 128,319,819
------------ ------------
<CAPTION>
SHARES
---------------------
<C> <S> <C> <C> <C>
SHORT TERM SECURITIES--(0.6%)
733,826 Brinson Supplementary Trust U.S. Cash
Management Prime Fund 733,826 733,826
------------ ------------
Total Portfolio of Investments 100%........ $131,594,809 $129,053,645
============ ============
</TABLE>
------------------------
(a) Moody's as a matter of policy, does not rate this issue.
* Standard & Poor's Corporation rating. Security is not rated by Moody's
Investor Service, Inc.
144-A Securities exempt from registration under Rule 144-A of the Securities
Act of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At March 31,
2000, the value of these securities amounted to $19,110,004 or 14.8% of
the total portfolio of investments.
See Notes to Financial Statements.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Fort Dearborn Income Securities, Inc. ("the Company") is registered under
the Investment Company Act of 1940, as amended, as a diversified closed-end
management company. The Company invests principally in investment grade
long-term fixed income debt securities with the primary objective of providing
its shareholders with:
- a stable stream of current income consistent with external interest rate
conditions, and
- a total return over time that is above what they could receive by
investing individually in the investment grade and long-term maturity
sectors of the bond market.
The following is a summary of the significant accounting policies followed
by the Company in the preparation of its financial statements. The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
A. SECURITY VALUATIONS -- Investments are valued based on available quoted
bid prices on the valuation date. Short-term securities are valued at amortized
cost which approximates value.
B. INVESTMENT INCOME AND SECURITY TRANSACTIONS -- Interest income is
recorded on the accrual basis. Dividend income is recorded on ex-dividend date.
Security transactions are accounted for on the trade date. The Company has
elected to amortize market discount and premium on all issues purchased after
September 30, 1994. Realized gains and losses from security transactions and
unrealized appreciation and depreciation of investments are reported on a
first-in first-out basis.
C. FEDERAL INCOME TAXES -- It is the Company's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Therefore, no provision for federal income taxes is required. Net
realized gains or losses differ for financial reporting purposes as a result of
losses from wash sales.
At March 31, 2000 for federal income tax purposes, the cost for long and
short-term investments is $131,594,809: the aggregate gross unrealized
appreciation is $2,716,976 and the aggregate gross unrealized depreciation is
$5,258,140; resulting in net unrealized depreciation of investments of
$2,541,164.
2. NET ASSET VALUATIONS
The net asset value of the Company's shares is determined each day the New
York Stock Exchange is open.
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 2000 (UNAUDITED)
3. DISTRIBUTIONS
Dividends and distributions payable to shareholders are recorded by the
Company on the record date. Net realized gains from the sale of investments, if
any, are distributed annually. Net investment income and realized gains and
losses for federal income tax purposes may differ from that reported on the
financial statements because of permanent and temporary book and tax basis
differences.
Distributions from net realized gains for book purposes may include
short-term capital gains which are included as ordinary income for tax purposes.
4. CAPITAL STOCK
At March 31, 2000 there were 12,000,000 shares of $.01 par value capital
stock authorized, and shareholder capital of $135,120,133. During the six months
ended March 31, 2000 no new shares were issued as part of the dividend
reinvestment plan.
5. PURCHASES AND SALES OF SECURITIES
Purchases and sales (including maturities) of portfolio securities during
the six months ended March 31, 2000 were as follows: debt securities and
preferred stock, $11,226,900 and $19,389,916, respectively; short-term
securities, $9,692,201 and $9,883,358, respectively; United States government
debt obligations, $24,439,119 and $14,460,139, respectively.
6. MANAGEMENT AND OTHER FEES
Under an agreement between the Company and Brinson Partners, Inc. ("the
Advisor"), the Advisor manages the Company's investment portfolio, maintains its
accounts and records, and furnishes the services of individuals to perform
executive and administrative functions for the Company. In return for these
services, the Company pays the Advisor a quarterly fee of 1/8 of 1% (annually
1/2 of 1%) of the Company's average weekly net assets up to $100,000,000 and
1/10 of 1% (annually 2/5 of 1%) of average weekly net assets in excess of
$100,000,000.
All Company officers serve without direct compensation from the Company.
The Company invests in shares of the Brinson Supplementary Trust U.S. Cash
Management Prime Fund ("Supplementary Trust"). The Supplementary Trust is an
investment company managed by the Advisor. The Supplementary Trust is offered as
a cash management option only to mutual funds and other accounts managed by the
Advisor. The Supplementary Trust pays no management fees. Distributions from
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 2000 (UNAUDITED)
6. MANAGEMENT AND OTHER FEES (CONTINUED)
the Supplementary Trust are reflected as interest income on the statement of
operations. Amounts relating to those investments at March 31, 2000 and for the
period ended are summarized as follows:
<TABLE>
<CAPTION>
% OF
COST OF SALES INTEREST NET
FUND PURCHASES PROCEED INCOME VALUE ASSET
---- ---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Brinson Supplementary Trust U.S. Cash
Management Prime Fund.................... $9,692,201 $9,883,358 $58,966 $733,826 0.6%
</TABLE>
7. MORTGAGE BACKED SECURITIES AND OTHER INVESTMENTS
The Company invests in Mortgage Backed Securities (MBS), representing
interests in pools of mortgage loans. These securities provide shareholders with
payments consisting of both principal and interest as the mortgages in the
underlying mortgage pools are paid. Most of the securities are guaranteed by
federally sponsored agencies -- Government National Mortgage Association (GNMA),
Federal National Mortgage Association (FNMA) or Federal Home Loan Mortgage
Corporation (FHLMC). However, some securities may be issued by private,
non-governmental corporations. MBS issued by private entities are not government
securities and are not directly guaranteed by any government agency. They are
secured by the underlying collateral of the private issuer. Yields on privately
issued MBS tend to be higher than those of government backed issues. However,
risk of loss due to default and sensitivity to interest rate fluctuations is
also higher.
The Company invests in Collateralized Mortgage Obligations (CMOs). A CMO is
a bond which is collateralized by a pool of MBS. The Company also invests in
REMICs (Real Estate Mortgage Investment Conduit) which are simply another form
of CMO. These MBS pools are divided into classes or tranches with each class
having its own characteristics. The different classes are retired in sequence as
the underlying mortgages are repaid. For instance, a Planned Amortization
Class (PAC) is a specific class of mortgages which over its life will generally
have the most stable cash flows and the lowest prepayment risk. A GPM (Graduated
Payment Mortgage) is a negative amortization mortgage where the payment amount
gradually increases over the life of the mortgage. The early payment amounts are
not sufficient to cover the interest due, and therefore, the unpaid interest is
added to the principal, thus increasing the borrower's mortgage balance.
Prepayment may shorten the stated maturity of the CMO and can result in a loss
of premium, if any has been paid.
The Company invests in Asset Backed Securities, representing interests in
pools of certain types of underlying installment loans or leases or by revolving
lines of credit. They often include credit enhancement that help limit investors
exposure to the underlying credit. These securities are valued on the basis of
timing and certainty of cash flows compared to investments with similar
durations.
15
<PAGE>
REPORT ON THE AUTOMATIC DIVIDEND INVESTMENT PLAN
THE COMPANY'S AUTOMATIC DIVIDEND INVESTMENT PLAN, OPERATED FOR THE
CONVENIENCE OF THE SHAREHOLDERS, HAS BEEN IN OPERATION SINCE THE DIVIDEND
PAYMENT OF MAY 5, 1973.
For the six months ended March 31, 2000, 50,682 shares were purchased for
the Plan participants. The breakdown of these shares is listed below:
<TABLE>
<CAPTION>
WHERE
DIVIDEND NO. OF SHARES
PAYMENT SHARES AVERAGE WERE
DATE PURCHASED PRICE PURCHASED
-------------------------------------------------------------
<S> <C> <C> <C>
December 10, 1999 26,263 $12.56 Open Market
March 24, 2000 24,419 $12.90 Open Market
</TABLE>
As explained in the Plan, shares are purchased at the lower of the market
value (including commission) or net asset value, depending upon availability.
The expense of maintaining the Plan, $1.35 for each participating account per
dividend payment, is borne by the Company. Shareholders who have not elected to
participate in the Plan, receive all dividends in cash.
The Plan had 981 participants on March 24, 2000. Under the terms of the
Plan, any shareholder may terminate participation by giving written notice to
the Company. Upon termination, a certificate for all full shares, plus a check
for the value of any fractional interest in shares, will be sent to the
withdrawing shareholders, unless the sale of all or part of such shares is
requested. ANY REGISTERED SHAREHOLDER WHO WISHES TO PARTICIPATE IN THE PLAN MAY
DO SO BY WRITING TO THE PLAN'S AGENT, EQUISERVE, P.O. BOX 2500 JERSEY CITY, NJ
07303-2500 OR CALLING THEM AT (800) 446-2617. A copy of the Plan and enrollment
card will be mailed to you. Shareholders who own shares in nominee name should
contact their brokerage firm. All new shareholders will receive a copy of the
Plan and a card which may be signed to authorize reinvestment of dividends
pursuant to the Plan.
* THE INVESTMENT OF DIVIDENDS DOES NOT RELIEVE PARTICIPANTS OF ANY INCOME
TAX WHICH MAY BE PAYABLE THEREON. THE COMPANY STRONGLY RECOMMENDS THAT ALL
AUTOMATIC DIVIDEND INVESTMENT PLAN PARTICIPANTS RETAIN EACH YEAR'S FINAL
STATEMENT ON THEIR PLAN PARTICIPATION AS A PART OF THEIR PERMANENT TAX RECORD.
THIS WILL INSURE THAT COST INFORMATION IS AVAILABLE IF AND WHEN IT IS NEEDED.
16
<PAGE>
REPORT ON ANNUAL MEETING
At the annual meeting of shareholders, held on December 13, 1999;
shareholders elected the Company's five nominees as directors and ratified the
selection of accountants. The votes on such matters were as follows:
<TABLE>
<CAPTION>
DIRECTORS FOR
1. ------------- ---------
<S> <C> <C>
R.M. Burridge 6,994,747
C.R. O'Neil 7,000,887
R.S. Peterson 6,994,940
F.K. Reilly 6,960,982
E.M. Roob 7,004,907
</TABLE>
2. Ratification of Accountants (KPMG LLP)
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN BROKER NON-VOTES
--------- -------- -------- ----------------
<S> <C> <C> <C>
7,000,943 58,658 71,725 0
</TABLE>
17
<PAGE>
BOARD OF DIRECTORS
RICHARD M. BURRIDGE
Chairman of the Board
C. RODERICK O'NEIL, CFA
Director
RICHARD S. PETERSON
Director
FRANK K. REILLY, CFA
Director
EDWARD M. ROOB
Director
OFFICERS
GARY P. BRINSON, CFA
President
GREGORY P. SMITH, CFA
Vice President & Portfolio Manager
JOSEPH A. ANDERSON
Secretary & Treasurer
DANIEL J. BLUMHARDT
Assistant Secretary & Assistant Treasurer
FORT DEARBORN
INCOME SECURITIES, INC.
209 S. LaSalle St.
Eleventh Floor
Chicago, Illinois 60604-1295
(312) 346-0676
STOCK TRANSFER AND
DIVIDEND DISBURSEMENT
AGENT
(1-800-446-2617)
Mail correspondence to:
EquiServe
P.O. Box 2500
Jersey City, New Jersey 07303-2500
Mail stock certificates to:
EquiServe
P.O. Box 2506
Jersey City, New Jersey 07303-2506
INDEPENDENT AUDITORS
KPMG LLP
303 East Wacker Drive
Chicago, Illinois 60601
LEGAL COUNSEL
Winston & Strawn
35 West Wacker Drive
Chicago, IL 60601
18
<PAGE>
FORT
DEARBORN
INCOME
SECURITIES,
INC.
FORT DEARBORN INCOME SECURITIES, INC.
[NYSE LOGO]
[CHICAGO STOCK EXCHANGE LOGO]
SEMI-ANNUAL REPORT
MARCH 31, 2000
